Buy Cree In Spite Of Recent Rally

| About: Cree, Inc. (CREE)

Few Investors do the regular review of their holdings, other than to look at the last stock prices. The minimum number of times needed to review holdings is four times a year: once for each time quarterly earnings are reported. Cree, a company being tracked for the long-term, reported earnings recently

When Cree (NASDAQ:CREE) reported Q3 earnings on April 17 2012 for the quarter ended March 25 2012, shares closed at $31.90, peaked on May 7 2012 at $32.88 and eventually bottomed at $22.78 on July 24. Shares traded lower in the previous quarter. Investors reacted negatively when the company accumulated inventory and needed time to integrate its sales team. When the more recent Q4 earnings were reported for the quarter ended June 24 2012, the figures were more steady than anticipated.

Based on the closing prices on August 13, Cree rose 8.2% for the week, and 19.4% for the month.

How should investors interpret CREE's earnings result? Is Cree a company to buy in spite of the rally?

Quarterly Results

For the fourth quarter:

  • Revenue was $307 million.
  • Non-GAAP net income was $29 million ($0.25 per diluted share).

Cree saw improving gross margins of 70 basis points, to 36.3%, but this was due to a tax rate that was lower than forecast. Revenue improved by $14 million (up 16% from Q3), helped by the launch of new products. Cree also reduced inventory by $8 million (85 days).

Cree provided the following outlook for its next quarter:

  • Q1 revenue range of $305 - $325 million
  • GAAP margins of 36% (37% non-GAAP)
  • GAAP net income in the range of $10 - $16 million on 116 million diluted shares outstanding
  • GAAP EPS between $0.09 - $0.14 per diluted shares
  • Non-GAAP net income of between $27 - 33 million
  • Non-GAAP EPS between $0.23 - $0.28 per diluted shares

Analysis of Results

It would be favorable if investors were exposed to companies insulated from macroeconomic turmoil. Yet LED is a global business for Cree, which exposes macro risks for investors. Still, Cree is leading the LED market, and continues to lead by improving on the performance of its products. LED for the year was $757 million, and represented 65% of revenue. During the quarter, LED products generated $185 million in revenue.

The positives for buying Cree are that:

  • Cree is debt free, with cash and investments of $745 million
  • 500,000 shares were repurchased (average price was $23.98)
  • Days outstanding declined to 45 days, from 53 days at the end of March
  • Inventory days on hand dropped from 96 days in March to 85 days
  • Inventory was $189 million, down 8 million

Customers of Cree are keeping inventories low, which is beneficial if the global economy improves. Customers would react by increasing their orders. New product launches selling at a lower cost and will also help Cree improve its position as a leader in the competitive market by increasing market share.

One negative for the growth prospects for Cree is that it is facing substantial pressures in China. Cree is actively offsetting this by broadening its product mix globally. Outdoor municipal and commercial lighting represent the greatest share of revenue, with residential lighting the smallest. Home Depot (NYSE:HD) sells Cree products under its own brand, but the retail market remains a small part of Cree's business.

If Cree is able to lower the price point and improve upon the capabilities of its retail product, the product enhancement would potentially benefit Cree's other products. It would also raise awareness for LED. R&D costs will remain elevated, so investors will need to monitor Cree's ability to improve product function while managing costs.


The trailing P/E is calculated using the full-year fiscal 2012 results. Cree reported an 18% increase in revenue, to $1.16 billion. Cree reconciled its non-GAAP reporting from GAAP here to explain differences in the two measures. Cree derived non-GAAP figures by adjusting for stock-based compensation and amortization of acquisition-related intangible assets. Non-GAAP net income was $109 million or $0.95 per share, a 42% decrease year-over-year. GAAP earnings were $44 million ($0.39 per diluted share).

At a closing price of $27.85 on August 13, Cree trades at a trailing P/E of 29.3 (non-GAAP) and a P/E of 71 with GAAP.

Balance Sheet Analysis

Notable changes in its balance sheet include goodwill increasing to $616.3 million, up from $326.2 million in 2011. Cash declined from $1.08 billion to $745 million.


Cree provides positive long-term exposure for investors and should not be overlooked. The recent rise in Cree shares may pull back as markets trade lower, but this represents an entry point for those who missed the big rally.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.